For sale by government
New land laws and regulations facilitate disposal
of more than 2.2 million square meters
of government-owned real estate
as government disposes of these assets

For sale by government
New land laws and regulations facilitate disposal
of more than 2.2 million square meters
of government-owned real estate
as government disposes of these assets

More than 2.2 million square meters of government land and property is expected to change hands through either sale or acquisitions within the next couple of years, CARIBBEAN BUSINESS discovered. This government real-estate bonanza, based on current or planned transactions from five government agencies, is worth anywhere from $500 million to more than $1 billion and will help generate new economic activity worth millions more.

Public officers polled agreed most of this recent real-estate activity is the result of two main factors. Firstly, new land laws and regulations to expedite the process by which agencies convert idle or abandoned properties into cash. And second, a shift in attitude toward government real estate, which now is considered a valuable tool in the overall management of government assets.

Overall, the success of turning this land and property into cash will depend greatly on government agencies’ ability to develop and maintain accurate inventories. Surprisingly, all of this recent real-estate activity is taking place without an accurate government real-estate inventory.

Introduced four years ago, the federal Government Accounting Standards Board rule, known as GASB-34, dictates the way state, local and county governments prepare their financial statements. This includes the way government agencies have to prepare and depreciate their capital assets inventory. Still, most local agencies in charge of real-estate assets do not have accurate inventories. The Department of Transportation & Public Works (DTOP by its Spanish acronym), the largest real-estate titleholder agency, is actively engaged in developing new projects but has not been able to update its ever-changing inventory.

When asked, agency heads tend to dismiss the question by stating that either they’re working on it or that it’s a complicated matter. “You need to know precisely what you have in order to manage it properly, but that has not always been the case,” said Juan Vaquer director of the Land Administration. “In our case, since we depend 100% on our land to generate our agency’s income, we have come to know how important accurate inventories are and to keep them updated and current. This agency has always maintained a detailed inventory of its properties and we have a good geographical information system (GIS) to manage it. Historically, public corporations, because their bonds are backed by their assets, have done a better job of this than central government agencies.”

If and when agencies get their real-estate inventory up to date, industry experts believe their financial gains can be substantially increased while managing assets more effectively. “Economic activity generated from real-estate transactions will undoubtedly represent an important economic injection into the local economy. Gains will be realized in different ways from making agencies more self-reliant instead of depending on public funds, or by funding initiatives that will generate ongoing economic activity,” explained Leila Hernández Umpierre, acting executive director of the Public Buildings Administration (PBA). “Most importantly, I think we’re seeing a positive change in attitude toward running more efficient government agencies and managing assets more effectively.”

Four years ago, CARIBBEAN BUSINESS (CB, June 6 2002) did research on this matter and estimated there were more than 88 million square meters across the island, or approximately 22,389 cuerdas (one cuerda equals 0.97 acre) of idle or abandoned government property with an estimated market value of more than $7 billion.

New legislation fuels government real-estate bonanza
In addition to a new attitude toward effective real estate management, fueling this potential real-estate bonanza are recent changes in legislation such as amendments to Law 97, which among other things, allows the Public Building Authority to convert, sell or lease properties to the private sector to generate income. Also recently, DTOP, the government’s largest real-estate titleholder, will be able to secure project permits on all of its projects within 45 days. This will expedite construction of new facilities, highways, mixed-used properties, appropriations, land swaps or relocation of structures.

As part of its agency overhaul, the Puerto Rico Industrial Development Co. (Pridco) is aggressively pursuing long-term leasing opportunities on all of its industrial properties. This will not only result in a sizeable and expedient reduction of vacant industrial parks but will add to the agency’s projected $24 million in payroll savings annually.

“By reducing our property inventory, we will cut on maintenance, payroll and equipment costs among other expenses,” said Alfredo Pérez Zapata, Pridco’s executive assistant director of infrastructure and development. “This reflects a significant change in our management philosophy to become more agile within an increasingly competitive global marketplace.”

The Land Authority (LA), on the other hand, instead of getting rid of land is quickly moving to restore its original land reserve of 100,000 cuerdas to guarantee availability for future agricultural use. Its real-estate management program allows it to sell land inventory to raise funds to continue buying reserve land.

Government real-estate deals run the gamut from developing a small parking lot to DTOP’s Corridor of Knowledge being developed in partnership with the University of Puerto Rico. Real-estate experts predict prices will continue to go up thus positioning the island’s largest real-estate holder, the government of Puerto Rico, in a good bargaining position.

“If you’re the owner of the land, you could find yourself in a very good position. The opposite is also true if you or an agency needs to buy real estate for a particular development. It’s a matter of supply and demand and real-estate prices will vary according to a number of factors from location, projected use, and activity to market demand and interest rate. The price range is extensive going from one cuerda of land as low as $5,000 up to as much as $100,000 or higher depending on the projected use of the land,” explained David Ouviña, a certified real-estate appraiser, regarding the government’s plan to dispose of valuable real estate.

“Worldwide real-estate prices are going up dictated by demand and increased mobility of people within an increasingly global economy. People and businesses can simply choose where in the world they’d like to live or do business. Puerto Rico is not exempt from global trends, especially given the very limited amount of land available to develop both commercial and residential projects. Prices are bound to go up,” continued Ouviña, who added government agencies must be careful in not getting rid of properties they may need in the future. “It’ll be harder and more expensive to acquire them back.”

Granted, a large portion of the available land cannot be sold because it is either in reserve, destined for specific uses or simply not useful for any major development, explained Land Administration’s Vaquer who added: “Not everything you see on the books is available.”

Pridco shifts from quantity to quality
For Pridco, the goal is twofold. Firstly, to move its industrial inventory from quantity to quality and to strategically develop fewer but better industrial parks, putting all its properties to better use. This will entail developing, and redeveloping choice properties and eliminating properties from its inventory, which do not serve high-tech industries. Secondly, and although Pridco also owns land, its real-estate management efforts will focus on eliminating unused or obsolete building infrastructure.

Chief among its inventory-reduction strategies is Pridco’s plan to bring down the number of industrial parks from 200 to 50, a 75% reduction, over the long term. This will not only facilitate building availability to the private sector but will also allow Pridco to capitalize on its assets while reducing maintenance costs. In all, it will allow it to zero in on quality state-of-the-art industrial parks for high-tech industries.

As a continuation of Pridco’s overhaul, which has trimmed down its workforce from 650 to 330, the accelerated real-estate inventory liquidation will further contribute to the agency’s cost savings and revenue generation plan. Pridco’s goal is to lower its headcount to 235 by the end of the year.

“Our real-estate inventory is comprised of 824 industrial buildings, which constitutes a total of 1,639 rentable units. For the current fiscal year ending June 30, 2007, Pridco assigned $5 million for the maintenance of its properties including permanent improvements, which is an annual projected amount,” said Pérez Zapata. He added that maintenance efforts cover a total of 25.1 million square feet of industrial building space, of which approximately 19.1 million square feet is currently leased.

Building lease rates are based on a 10-year contract, which ranges from $2 to $6 a square foot per year for the first five years and from $2.45 to $6.45 per square foot per year for the other half of the lease. These rates are for standard buildings that have an average ceiling height of 12 feet to 16 feet. Custom-built buildings with higher ceiling heights (20 feet to 30 feet) command a higher square footage price.

Pridco’s leasing map is divided into five zones and rates vary accordingly. The general rule is that areas with higher unemployment typically have lower square-foot rates. This was designed to encourage companies to establish within high unemployment zones. Current vacant building space is approximately six million square feet, of which 4.8 million square feet is under negotiations to be leased.

“Regarding our land-development efforts, we continue to be aggressive and focused on developing choice properties with state-of-the-art technology and infrastructure. Next in the pipeline are two industrial parks in Dorado and Guayama; continued land development in Moca and Aguadilla with acquisition of land for a joint project with Hewlett-Packard. The combined investment of these projects total about $31 million over the next couple of years,” said Pérez Zapata. These projects will be an addition to Pridco’s land inventory which, as of May 2006, totaled 7,700 cuerdas spread out over 1,416 land parcels. An estimated 78% of Pridco’s land is developed.

Pridco’s newly established office of Real Estate Strategic Development will help identify properties that can be disposed of. The new office has initiated a preliminary study to help identify which properties to eliminate from its inventory. It has already targeted 42 cuerdas considered to be highly valuable for commercial use. “The objective is to make sites available and facilitate access to the private sector while at the same time capitalizing on properties, which were otherwise idle and not producing any income,” said José Vargas, Pridco’s director of strategic real-estate development. Requests to buy land from Pridco are reviewed on an ongoing basis and evaluated based on site use, environmental impact and financial condition of the buyer among other things.

’For rent’ sign up
Meanwhile, the Public Building Authority (PBA) has put its ‘For Rent’ sign up on several agency properties that will be converted to multiuse facilities.

With land parcels valued at more than $11 million and thousands of square feet of available office space spread throughout 578 structures around the island, the PBA is sitting on a small pot of gold if it is able to rent most of its empty office space. Its goal is to reach 85% to 100% occupancy within the next two years, up from its current approximately 50%. It will also sell land on a case-by-case basis, explained Leila Hernández Umpierre, the PBA’s acting executive director.

“We’re very excited about changes brought by Law 97. We used to depend 100% on government funds and now are moving quickly to maximize existing inventory to generate revenue. This will increase our ability to service our other agency clients better,” said Hernández Umpierre. “We’re finalizing our property inventory and evaluating sales and marketing initiatives to promote our properties within the private sector. From a competitive standpoint, we are offering quality office space at very competitive rates often much less than the current commercial rate. Our For Rent and For Sale signs are up and we’ll be marketing our properties aggressively.”

Since most of the properties built by the PBA until now have been financed with funds from government bonds, the sale of some of the structures will have to comply with debt-repayment conditions. Meanwhile, the PBA is moving full-speed ahead with 93 construction projects including schools, government centers, fire stations, vocational centers, expansions and remodeling jobs. The PBA’s construction projects will require an investment of $445 million and will help generate 900 jobs during construction.

Two of its top projects include opening the 40,000-square-foot government center in Comerío to be occupied primarily by other government agencies and the 60,000-square-foot mixed-use government center in Aibonito, available for lease beginning in December, which will feature ample parking and commercial space on the lower level. The Aibonito and Comerío centers are an addition to the PBA’s existing 39 government centers with a combined 296,496 square feet. The PBA services the building needs of the Corrections, Health, Police, Fire and Education departments.

Land Administration with a vision of the future
For Vaquer, of the Land Administration, the challenge is to continue strengthening the agency, which maintains a land inventory for diverse development purposes to guarantee access to land for projects that will generate economic development now or in the future.

One important challenge facing the administration is its dwindling land inventory, currently at 18,000 cuerdas, in stark contrast to the original 60,000 acquired by the administration when it was established in 1962. “Now more than ever, we’ll review long-term leasing agreements as a good option to generate revenue and remain vigilant of how we use our land resources. We can structure leasing agreements from 20 years to as long as 50 years if need be and will continue to acquire land in line with our vision of the future,” explained Vaquer. The administration has a $25 million fund to buy land and properties.

Agency projects have varied greatly from facilitating the land of the new San Juan Center, where the José M. Agrelot Coliseum is located and where over 3,000 housing units have been built, to the development of the Camuy Caves in partnership with other relevant agencies to the ownership of important natural resources such as the Tortugueros Lagoon.

But one of Vaquer’s main concerns is to protect the agency’s ability to reserve a land inventory for future generations. “Too often we forget that this is a very small island and we use up land as if it were unlimited. In Puerto Rico, we need to strike a balance, thinking more about the long term and being smarter about how we use land now. Sometimes acquiring land for the use of generations to come may be more appropriate than what others are considering in the short term,” mentioned the Land Administration executive. “As we look to our precious, and very limited, land space to promote economic activity, agency heads now charged with this responsibility and the government as a whole must be extremely careful not to get rid of land that should be available for future growth.”

Vaquer quickly referred to the Land Administration’s intervention to acquire the site of the original El Conquistador Hotel in Fajardo when it closed in 1988. “It was our explicit intention to secure the land for future redevelopment as another hotel and that site became the location for the new El Conquistador Hotel & Resort, which generates hundreds of jobs and contributes to the local economy. It was the administration’s job to have that vision of the future in the case of El Conquistador to protect the land for what came next,” explained Vaquer.

Contrary to other real-estate holding agencies, which are now beginning to have more flexible land management rules, the administration does not have to focus on one particular area and can expropriate, acquire, sell and lease real estate in a more expedient manner without the intervention of the Department of Justice.

Some of the administration pipeline projects include a parking and office development near the Coliseum and a lease option for the land lot adjacent to Hacienda’s south parking garage.

DTOP focuses on Tren Urbano
As the largest titleholder of the majority of government land and properties, DTOP has one of the most challenging tasks when it comes to government real-estate management.

“The situation is very complicated when trying to identify HTA’s road construction remnants or vacant public school buildings. Records change on an ongoing basis,” said Liz Meléndez, director of the Urban Development Office at DTOP when asked about remnants and any records of vacant schools on its books. DTOP does have a unit-by-unit record of every school, building, parcel, land remnant and other properties that go back to 2002. The record is outdated, complicated and not very practical.

The Department of Education (DE) did confirm it has a total of 1,013 properties and land lots not in use. Interim Secretary of Auxiliary Services José Berdecía indicated this number could vary due to a number of reasons. A total of 1,525 schools will be available for next semester.

DTOP Secretary Gabriel Alcaraz said a great deal of real-estate development emphasis is being given to three major initiatives including Ciudad Mayor, Ciudad Red and Mayagüez 2010.

The first phase of Ciudad Red, an integrated development to populate areas surrounding the Tren Urbano, will attract a total of $637 million from the private sector for the development of eight major multi-use projects around the Domenech, Martínez Nadal, Roosevelt, Hato Rey, Sagrado Corazón and Cupey train stations. Most projects on Ciudad Red will start construction later this year and will conclude at different times before May 2008. DTOP’s projected income from this initiative will be close to $47 million. Additional economic activity will come from approximately 1.1 million square feet and 178,000 square feet in office and retail space, respectively.

“The idea is to bring people to the area to create demand for products and services, and ultimately increase train ridership,” explained DTOP’s Alcaraz, who confirmed a total 1,311 housing units will also be built during Ciudad Red’s first phase.

Ciudad Red’s second phase will kick off with requests for proposals on five additional, smaller development projects of one cuerda or less. Proposals will be issued later this month.

Land Authority to reach 100,000 cuerdas
Operating under the Department of Agriculture, the Land Authority (LA) has been charged with the task of increasing its land inventory from its current 93,000 cuerdas to 100,000 to meet Gov. Acevedo Vilá’s commitment to agricultural development. This would bring the agency’s land reserve back to its original 100,000 cuerdas when it was first established in 1941. Before he can do that, the LA’s executive director Luis F. Soto will put between 2,000 and 2,500 cuerdas on the block within the next two years to raise some of the funds it needs to buy additional land to fulfill its land reserve goal. He estimates the sale of this land to generate between $10 million and $12.5 million, based on an average $5,000 per cuerda.

“The idea is to secure a good land reserve for agricultural purposes for generations to come,” said Soto, stating the LA generates about $5 million a year in lease revenue, helping keep the agency afloat without public funds. Currently, 70% of its land inventory or 65,100 cuerdas is leased.

“Most of the land under the authority’s management is along the perimeter of the island. Extending from Hatillo to Toa Baja in the northwest; Carolina to Yabucoa in the southeast, Arroyo to Ponce in the south, and going southwest to Guánica, Lajas, Cabo Rojo, San Germán and Aguada,” explained Soto.

Lease rates vary depending on the type of project involved and can range from as low as $50 per cuerda per year to a high $450 per cuerda not including applicable municipal taxes. However, since most of the land contracts are agriculture related, Law 225, P.R. Agriculture Tax incentives law, allows for municipal tax exemption on certified agriculture projects.

Soto added: “Our main focus is on leasing property for agriculture related projects. However, we can also lease or sell land that can be used for such other purposes as community initiatives, housing, public schools and recreational purposes.”

A typical lease contract from the LA runs for five years. If a tenant forfeits its contract before the end of its term, a penalty equivalent to six months of leasing payments is assessed. Anyone can apply to lease land from the authority, however, it must comply with an initial application, orientation and formal proposal prior to approval.

Last year, the LA sold approximately 100 cuerdas compared with 1,500 cuerdas sold the previous year, of which 1,300 went to the Department of Natural & Environmental Resources under the Herencia 100,000 conservation program.

Land Authority

Total land: 93,000 cuerdas
Long-term leases: 65,100 cuerdas
Rent income: $5 million
Projected additional income from land sales: $10 million to $12.5 million
Municipalities: 30

Land Administration

Total land: 18,000 cuerdas
Long-term leases: 3,000 cuerdas
Long-term revenue FY 2005: Approximately $8 million
Short-term leases or reserved for future use: 15,000 cuerdas
Short-term revenue FY 2005: Approximately $15.4 million
Municipalities: 52

Department of Transportation & Public Works
Phase I Land Development Urban Train

Private-sector investment: $637 million
Revenue area: $46.7 million, 22.9 cuerdas (mixed use)
Office space: 1.1 million square feet
Retail space: 178,000 square feet

Total inventory
Land (2002): 6,260 units
Property (2002): 1,300 units
Municipalities: 78

Public Buildings Authority

Schools 386
Government Centers 53
Court centers 36
Police stations 103
Public buildings 578 units
Construction projects 93
Investment new projects $445 million
New construction jobs 900
Leasing goal 85% to 100% in two years
Municipalities 78

Pridco

Total land: 7,700 cuerdas
Total land developed: 6,000 cuerdas
Buildings leased: 19.1 million square feet
Buildings available: 1.2 million square feet
Payroll savings: $24 million annually
Projected income from long-term building sales: $100 million-plus
Municipalities: 78

1 cuerda = 0.97 acres

Puerto Rico Industrial Development Co.
Rental Zones for Industrial Building

Zone 1 Height
12’ to 16’: $6.00 sq. ft. $6.45 sq. ft.
20’: $7.00 sq. ft. $7.45 sq. ft.
30’: $8.00 sq. ft. $8.45 sq. ft.

Zone 2 Height
12’ to 16’: $4.25 sq. ft. $4.70 sq. ft.
20’: $4.95 sq. ft. $5.40 sq. ft.
30’: $5.65 sq. ft. $6.10 sq. ft.

Zone 3 Height
12’ to 16’: $3.50 sq. ft. $3.95 sq. ft.
20’: $4.10 sq. ft. $4.55 sq. ft.
30’: $4.65 sq. ft. $5.10 sq. ft.

Zone 4 Height
12’ to 16’: $3.00 sq. ft. $3.45 sq. ft.
20’: $3.50 sq. ft. $3.95 sq. ft.
30’ $4.00 sq. ft. $4.45 sq. ft.

Zone 5 Height
12’ to 16’: $2.00 sq. ft. $2.45 sq. ft.
20’: $2.35 sq. ft. $2.80 sq. ft.
30’: $2.65 sq. ft. $3.10 sq. ft.

Notes

1. Rental rates shown apply only to existing typical buildings.
2. Rental rates for typical and general purpose buildings in construction as of July 1, 2003 will be negotiated upon new rents shown.
3. Rental rates for buildings for nonindustrial use will be 50 cents higher than the established rates herewith.
4. Rental rates for special buildings will be computed according to construction cost, plus the market value of the land, using 1% over prime interest rate.